Growing the economy, not more regulation, is the key to ending the housing slump

Sluggish economic growth and rising unemployment have experts mentioning the dreaded “R” word – recession. And the “housing crisis” is getting more than its fair share of the blame.

In reality, the housing industry simply can’t live up to its reputation as a major driver of the U.S. economy. The housing industry’s woes are really a symptom of larger economic problems, not the cause of a recession or downturn.

This observation may seem a bit odd. After all, economists at the National Association of Homebuilders estimate that the economic value produced by the housing industry may represent as much as 15 percent of the national economy. Every new home generates about $80,000 in new wages and 2.4 new jobs in construction and related industries. These are impressive numbers.

So, when the nation’s largest mortgage lender, Countrywide, decides to sell out to Bank of America in the wake of record high foreclosure rates, and large homebuilders such as Levitt and Sons and KB Homes are either in bankruptcy or teetering on the edge, the economy has to suffer. Doesn’t it?

Yes, but not in ways that would prompt an economic recession.

First, all jobs and wages don’t have the same economic impact. Demand for housing is “derived demand.” It’s the result of income generated in other parts of the economy, most notably manufacturing, exports, and business services. These sectors produce goods and services that are globally competitive and sold outside a local area, generating income that can then be spent by employees (and their families) on local goods and services like housing, entertainment, and dining.

Homes are built only if the demand for them exists, and the demand can’t exist without the production of goods and services that are sold elsewhere.

Second, “record” foreclosures may grab headlines, but that doesn’t mean their impact is economy-wide. Just 1.44 percent of mortgages are being foreclosed, and that’s not enough prompt a national recession.

It shouldn’t be a surprise, then, that overall economic growth is not a good predictor of the health of a local housing market. Employment is. Employees buy homes with the wages they earn, and the highest wages are earned from employees in high-value “export” industries, such as manufacturing, exports, information technology, and business services. As employment in these sectors stagnates, the housing market stagnates.

Thus, many economic observers get the story turned upside. It’s not that housing creates jobs. Rather, jobs create the demand for housing. Builders produce homes, and lenders make sure the financing is in place for workers to buy it.

What, then, of the so-called “sub-prime slime” and the tanking of the housing market? These are serious issues with serious consequences. But they should be kept in perspective.

Subprime loans represent just 6.5 percent of the overall home mortgage market. The vast majority of mortgages and homes are financially secure.

The larger problem for the economy is the credit crunch and uncertainty surrounding future lending. As foreclosures have increased, and large mortgage lenders have grappled with larger than expected right downs, banks and agencies that guarantee mortgages have clamped down on all home lending until the full scale of the problem has emerged. Thus, even home buyers with good credit are getting caught in the lending squeeze.

Still, this is a problem for the housing sector, but unlikely to trigger a national recession (defined by economists as six months of negative growth).

As policymakers grapple with economic policy, they must avoid confounding the causes and symptoms of slowing economic growth. The housing sector is going through a substantial readjustment after a heady period. The most important factor in restoring its vitality will be policies that protect and promote broad-based economic growth, particularly in the industries that create the most wealth-business services, information technology, biomedical research, and high-end manufacturing.

Propping up the housing sector through guarantees and subsidies, or stricter regulation of financial services, might serve political goals, but they won’t improve the performance of the economy or the long-term viability of the housing industry.

Samuel R. Staley, Ph.D. is a senior research fellow at Reason Foundation and managing director of the DeVoe L. Moore Center at Florida State University in Tallahassee where he teaches graduate and undergraduate courses in urban planning, regulation, and urban economics. Prior to joining Florida State, Staley was director of urban growth and land-use policy for Reason Foundation where he helped establish its urban policy program in 1997.